Wednesday, June 25, 2008

Following up on Annie's post yesterday about when brands matter (and specifically brand packaging, in that particular case), I came across this article at Media Buyer Planner that suggests that under the right economic circumstances, the "luxury" aspect of a name brand may outweigh the potential value that habitual buyers place on the brand. To wit:

A sizeable 42 percent of consumers say they have given up favorite food brands because of rising prices and economic concerns, according to a study from Information Resources, Inc. that shows the lagging economy is driving a dramatic move back to basics and a reversal of decades-long trends for convenient and healthier foods, writes MarketingCharts.

Though changes in shopping and purchase behavior vary based on life stage and presence of children, those with lower-incomes report being the hardest hit (see chart):

Roughly half of all consumers with incomes less than $55,000 per year say they have trouble affording the groceries they need.

Nearly a quarter of those earning between $55,000 and $99,000 also say so.

Among those with incomes over $100,000, 16 percent report having trouble.

As a result, consumers are increasing purchases of basic ingredients and meal components, reducing restaurant spending and decreasing purchases of “non-essentials” (see table):

53 percent of consumers report that they are cooking from scratch more now than they were six months ago.

About 59 percent say they are buying fewer single-serving products.

55 percent say they are buying fewer prepared meals.

52 percent say they are buying fewer organic products.

Stores are seeing a resurgence in sales of frozen foods, perishables, and “center-store” items.

Private-label products show strong gains, with 50 percent of consumers saying they have stepped up their spending on such products in the last six months.

Despite America's love affair with food, at a certain point the economic pain becomes such that items that were once thought of as essential get reclassified as not really necessary, and thus, luxuries that can be cut back on.

What does that mean for the grocer or food retailer? Well, it depends on how they're handling their product segmentation, and who their target customers are. Obviously those catering to the upper-middle class will be hurt less, as fewer of these people have (so far) reported having any problems. That means they probably haven't cut back on luxury spending yet (or, more accurately, they haven't needed to reclassify brand-name food item purchases as luxuries yet). For the rest, though, the news might be more sobering. One possible exception is grocers with strong private label brands. For a lot of these guys, their private label is becoming a high-margin and increasingly upscale brand that can stand head-to-head with more established name brands while still offering strong value to the consumer. As consumers continue to tighten their belts (figuratively), expect to see more of them hold off on tightening their belts (literally) by trading brand loyalty and perceived brand value for the bona fide value that high-quality private label brands can offer (note that crappy off-brand goods probably won't get a boost in this case, which is as it should be, if you ask me).

3 comments:

Retail Media Exec
said...

I don't know if you had a chance to read Kroger's conference transcript yesterday, but your conclusions are spot on. Their "Private Selection" brand, which is a higher end in-house offering, was up considerably in Q1 and will be a $1 Billion brand this year.

One trend that also wouldn't appear in supermarket-based research is that people are starting to rely more on gardens, local produce, and farmer's markets where available. There was a big surge in vegetable garden supply purchases from stores like Home Depot and local nurseries, something these stores didn't anticipate in their stock orders (it's hard to have an "inventory" of vegetable seedlings).

The budget squeeze is complicated by the fact that Americans really are used to spending less on food than their counterparts in other countries: we use a smaller percentage of our income on food, we buy food less frequently, and we waste more. Like higher gas prices, the trend upward in food prices may not go away if the economy improves. Add in a bunch of crises caused by nature (floods, for example) and it may be quite a while before people stop feeling the pinch in the grocery store.

RME: I've since seen a few (Kroger, Safeway, and somebody else) who've talked about how they're beating expectations and even growing their business during the downturn thanks to the strength of their private label brands, and the fact that more people are opting for the "value" packaging instead of their typical name-brand purchases.